Highway Contractor

John Latta

| January 12, 2012 |

Another Testing

12 Months

The recovery continues. Slowly. Slowly.

It’s frustrating (again) to have to say it, but it appears that this new year will offer us more of the same. Last year virtually repeating itself, as did the year before that and the year before that.

But this time there appears to be at least some optimism that the economy’s vicious cycle may be approaching its end, albeit with more of a whimper than a bang. And within a handful of bright, or at least not gloomy, spots there may be opportunities for transportation agencies and highway and bridge contractors to be pro-active in their fight against the agonizingly slow recession climb-out.

Not only is reauthorization a pivotal event (whether it happens or doesn’t) but also the states’ struggles to fund even essential work, and the need, that can no longer be put off, to do repair or maintenance work will be key influences. And then there is an election in November. As one leading transportation industry group analyst told Better Roads in Washington, D.C., in December: “2012: It’s a make-or-break year for transportation infrastructure.”

As the American Road and Transportation Builders Association (ARTBA)’s Dave Bauer points out, there are “50 autonomous markets” out there, making it not only difficult to come up with a single estimate for the United States, but also meaning that amid a sea of gloomy news there can be patches of economic sunshine that could make 2012 a very different place for some local or regional contractors and agencies.

A look at some of the leading forecasts for 2012 find a general agreement on the course the year will follow.

If economic forecasting is something of a crystal ball process, 45 professional forecasters surveyed by the Federal Reserve Bank of Philadelphia may be the best gazers in the business. These forecasters, surveyed by the Fed in November, predicted, on average, a real GDP growth of 2.4 percent in 2012 (the same figure that the National Association for Business Economics predicts; but Morgan Stanley and Kiplinger estimates are closer to 2 percent) and a 2012 unemployment rate of 8.8 percent. The Fed’s forecasters predicted growth of 2.7 percent in 2013 and 3.5 percent in 2014. The forecasters also predicted unemployment at 8.4 percent in 2013 and 7.8 percent in 2014. They expect nonfarm payroll employment to grow at a rate of 123,200 a month in 2012, compared to 106,500 a month in 2011. These same Fed forecasters estimate core Personal Consumption Expenditures (PCE) inflation in 2012 will average 1.6 percent, and 1.8 percent in 2013.

A Wall Street Journal survey of 52 economists in November put GDP growth in 2012 at 2.3 percent and 2.6 percent in 2013, with unemployment at the end of 2012 at 8.7 percent, and at 8.1 percent at the end of 2013.

But there seems to be little doubt the unemployment rate in construction, including transportation infrastructure, will exceed the national average through 2012 as it did, by a wide margin, through 2011.

Because the Federal Reserve is keeping the lid on short-term interest rates and also trying to bring down already low long-term rates, various estimates suggest there will be little significant movement of rates in 2012.

The election has the potential to be very influential to highway and bridge industries both before and after the polls close. “2012 is an election year, which does not body well for meaningful action in Washington,” says Association of Equipment Manufacturers (AEM) President Dennis Slater. “Both sides are already in full ‘campaign mode,’ it seems, and this presents a real danger of a stalling economy.” But the November elections may also offer some possible cause for optimism. A late-winter or early spring reauthorization, increasingly finding bipartisan support and looking more and more likely, might well help cement the idea in the public mind that transportation infrastructure is one of the essential investment programs for America’s future. This in turn may well become a position that might replace the refuse-to-spend-anything stands of some hardline politicians. Transportation investment may also be reasonably popular in the new Congress of 2013 which could be more supportive of transportation infrastructure funding than this one.

One thing that did happen in 2011 and that must continue in 2012 is the role of contractors in pressing Washington. Pressure in 2011 helped build the bipartisanship that unlocked stalled reauthorization negotiations. Industry groups urged contractors to be aggressive with members of Congress when they came back to their home districts, and get them out to jobsites and company facilities. Just how much of an effect such visits had is hard to pin down, certainly there have been major political and economic pressures, but there’s little doubt that contractor visits by congressmen helped start the ball rolling away from intransigence and towards bipartisanship. One leading Washington industry group lobbyist told Better Roads in December, “You can tell when you walk into the office of a member of congress who has made visits and who hasn’t, it’s a different atmosphere. They get it.” But as another said, “Our message is still not compelling enough.”

Our Survey

A Better Roads’ December survey of both agency and contractor readers reinforces the impression of uncertainty in the near future. But it also reinforces a growing hope for the long term, something that has been largely absent in our last two surveys. It’s almost as if the respondents were in a holding pattern mindset, working with less of everything – money, equipment, manpower, jobs – and looking beyond 2012.

From the Better Roads 2012 Outlook survey

Contractors

Do you expect changes next year in dealing with government agencies, e.g. contract bids, environmental regulations, sustainability requirements, etc.?

It’s a fine distinction, but interestingly, government agencies are a little more optimistic than contractors. But when it comes to specifics, the uncertainty is equally shared.

Only a few contractors (9.7 percent) plan to increase spending on new equipment or fleet replacements, 43.1 percent expect to spend the same as 2011 but 47.2 percent expect to spend less. A lot of contractors (43.1 percent) expected their financial results in 2012 to be about the same as 2011, with little more than a quarter (26.4 percent) predicting better results, but 30.6 percent expecting to fare worse.

Both surveyed groups expect more maintenance and less big new projects, something we have come to expect in these times.

It has been my sense that the industry is changing and will never return to a pre-recession structure, that changes wrung by the recession will exert a long-term influence. Precisely how is, of course, still largely guesswork as the economy still barely avoids stalling. Our survey shows a majority of contractors (56.9 percent) are unsure what changes will happen to the industry in 2012, but only a few (8.3 percent) expect it to return to the way it was before the recession. More than a third (34.7 percent) believe the industry has changed forever. Slightly less than half (45.8 percent) of contractor respondents anticipate that the kind of highway and bridge construction work put up for bids by their state will change in 2012. Among agencies, 33.9 percent say they expect to make changes to the kind of work they out up for bid.

From the Better Roads 2012 Outlook survey

Contractors

Do you expect your financial results this year to be better than last year, about the same, or worse?

Survey comments suggest contractors expect changes to include more maintenance and repair work and less new construction, smaller job packages, and relatively more bridge work as older bridges can no longer be left unworked. Or, as one respondent puts it, “What $ they have will be to band aid [sic] today’s problems.” Agencies looking at how the job mix may change also commonly see more repair and maintenance, smaller projects and more bridge work. Innovative bidding and “more quick fix, less rebuild” are also responses. One response suggests that, “projects will likely be those that can be advanced quickly, and will be projects that can be constructed within the existing footprint.”

From the Better Roads 2012 Outlook survey

Contractors

Do you anticipate that the levels of highway and bridge construction work put up for bids by your state in 2012 will increase, decrease or stay about the same?

Almost half (48.6 percent) of contractor respondents say they expect the levels of highway and bridge construction work put out for bids by their state agencies to stay about the same, and almost 40 percent (38.9 percent) expect it to go down. Only 12.5 percent saw a raise, perhaps reflecting the fact that some regions may actually buck the trend either through better income streams or by addressing needs that can no longer be avoided. Among agencies a majority (53 percent) expect the amount of work they put up for bid will stay about the same, but 26.8 percent expect it to fall, with 20.2 percent looking at an increase, again possibly reflecting regional or local factors.

From the Better Roads 2012 Outlook survey

Government Agencies

Do you anticipate that levels of highway and bridge construction work put up for bids by your agency in 2012 will increase, decrease or stay about the same?

Looking back at their operations over the past five years, most contractors say they have become leaner and more efficient, and those changes came not in the pursuit of expansion or profit but in the struggle for survival. In the coming year a majority of companies say they are seeking out new areas of work (51.4 percent) and nearly half (48.6 percent) say they would work in cooperation with other companies more than they have in the past. More than a quarter (26.4 percent) of contractor companies intend to use more software and digital planning and tracking, and almost one-fifth (19.4 percent) say they will bid a narrower range of work, i.e. specialize more. When asked where they see their companies in three years, a lot of respondents said they expected to be in much the same position they are in today, facing uncertainty and fighting for survival. But some expected to be beyond that stage and expanding.

When it comes to hard numbers, a little over a quarter of contractor respondents believe their financial results will be better this year than last year (26.4 percent), 43.1 percent percent results to be about the same and 30.6 expect a worse year.

Among surveyed agencies, 45.2 percent anticipate that transportation infrastructure in their area a year from now will be in “about the same” condition and 32.7 percent predict it being “worse.” This leaves only 22 percent of agencies who see the state of their infrastructure better a year from now. And nearly two-thirds (64.3 percent) of the agencies expect to make changes in the way they operate in 2012, as they continue to respond to economic pressures. One agency respondent says, “Hope I’m wrong!” and another, “We have already changed operations to a ‘new normal.’”

One major concern among contractors for 2012 is dealing with changing government regulations and practices. Asked if they expected changes in dealing with agencies, a huge 59.7 percent say yes. But how? Uncertainties seems to be present here too, with contractors expecting changes but not really sure what they’ll be. Comments in the survey suggest contractors expect more environmental restrictions, a possible backlog in processes as fewer people in government departments handle the same amount of regulation, and more sustainability requirements. One happy camper reports wryly, “Sure, there is never enough government regulation,” and another responds, “MORE, MORE and MORE REGS.” Says another, “Our government is always changing the way we do business. It is shameful how much time and effort is spent in reinventing the wheel.”

Outside Looking In

FMI, a company that describes itself as the largest provider of management consulting and investment banking for the engineering and construction industry, succinctly sums up the domestic construction market for this year by saying that “the broad picture is not dramatically different from last year.” The company sees a long and slow recovery in construction markets with put-in-place construction volume pushed out to 2015 before it matches the prior peak of 2007. Housing, says FMI, is a cloud hanging over an economic recovery, and another key issue is the expected decline in public spending.

FMI’s President and Chief Executive Officer Hank Harris tells us that he expects “a fairly slow crawl” out of the recession, but he is optimistic about the heavy-highway sector. “I think there’s a lot of good news looking out there five years. There’s bad news, too, of course. There’s government spending being down, continued uncertainty from government until at least after the elections at the earliest and there’s reauthorization. But I think if you had to pick a sector of construction to be in, heavy highway would be a good one.”

One reason for Harris’ optimism: “I think there is immense pent-up demand out there.”

And, says Harris, “If you look at the intermediate and long-term, there’s some very smart money betting on infrastructure, for example, some of the investment banks. People see we are underinvesting in infrastructure, that’s we are way behind. We’ve taught Americans that seeing orange barrels every five miles is normal. It’s not.”

Alison Premo Black, senior economist for the American Road and Transportation Builders Association, says that “no matter how you slice it, the outlook for the 2012 transportation construction market is mixed.” There is, she says, “good news and bad news for 2012, depending on the mode of transportation.” The bad news? “The highway and bridge construction market is expected to contract 6 percent, to $72.6 billion from an estimated $77 billion in 2011.” The value of bridge work is expected to drop by 10 percent from $26.3 billion to $23.6 billion, says Black, “primarily because nearly all projects that include ARRA investments are finished or underway, and state and local DOTs are pulling back on new projects. This is, she says, likely due to a combination of the delayed federal reauthorization bill and the continued state and local budget challenges.

The good news is out there in the form of more investment for ports and railroads. But, says Black, there is also good news in that, “the transportation construction market sector will remain the most stable industry sector as it has been for the past five years.” Black says between 2007 and 2011 the real value of highway and bridge construction, adjusted with the ARTBA Price Index for material prices, wages and inflation, fell only 10 percent. Over the same period, the real value of total construction work in the United States fell by one-third, from $1.1 trillion to an estimated $769 billion. “The historical stability of the transportation market is in large part due to the role of public-sector financing,” says Black.

And “public-sector financing” means reauthorization, which Black calls a “wild card,” and state budgets.

“I am as optimistic as I have ever been about the chances of getting a surface transportation bill done in 2012,” says Janet Kavinoky the U.S. Chamber of Commerce’s leading transportation expert. “Six months ago it would have been a very different story. The House was looking at doing a bill with only Highway Trust Fund money, which would have been a 35-percent cut. There was a lot of talk in the Senate but in fits and starts. In the fall, a lot of things changed, especially when House Speaker John Boehner announced he wanted to move a multi-year transportation bill and was willing to look for the money for it. I can’t tell you how significant that was – especially coming from someone who has never voted for a surface transportation bill. All of this is movement in the right direction. If no one believed a bill was going to get done, I don’t think we would see this progress.

“So I’m going to be positive – it’s been about five years since I said that,” says Kavinoky. “It’s nice to feel good about it for once.”

‘A Sigh of Relief’

But reauthorization is not going to turn on the light switch in a room darkened by the economy. It will take time to begin to help lift transportation infrastructure work back toward old levels.

“We are talking about bills that substantially change federal programs and structures, for example provisions designed to speed up project delivery and others to move more private investment into the system,” says Kavinoky, “and it will probably take a couple of years to get things implemented, and remember we are not talking about adding funding for transportation we are talking about trying to keep levels the same. We’re not seeing a sea change but at least a sigh of relief – so states can move forward with some projects instead of standing around waiting. I’ll take half full.”

Opportunity

Contractors do have some choices this year, says FMI’s Hank Harris, which may be accessible with an entrepreneurial or innovative mindset. Two possibilities in particular that Harris mentions stand out to Better Roads: partnering and unsolicited bidding.

“If you have private jobs,” Harris asks, “how do you get to the markets where the spending stream is likely to be healthier and get yourself participating? We’re not out of the woods in heavy highway. Clients tell us it’s very, very tough, but the good ones are getting through it and doing okay. Margins are not good, and there are very significant challenges. It’s tough, but they are finding work and staying in the black. The key is to avoid taking imprudent risk because you get panicked about your market. Manage your risk and be ready to hit it when things get better, as we think they will. Labor and equipment are the two biggest risks to manage; costs here must be managed and controlled. It’s blocking and tackling, but that’s what isnecessary now.

“But also be ready for growth. And opportunity.”

For example:

“There is a lot of partnering opportunity in this industry; some domestic, some with international firms trying to enter the U.S. market. And you can also work for smaller partners,” says Harris. “There are some gigantic jobs out there so big that they need more than one bonding company, let alone one contractor.” A lot of contractors responding to our survey (48.6 percent) indicate that partnering is one of the tactics they intend to pursue this year.

Harris also sees opportunities in 2012 for companies that approach the market without their usual routines and methods. “Companies all have their own culture; engineering firms tend to be analytically oriented and look at how they may project themselves into certain markets.” If contracting companies want to respond to private markets, says Harris, their culture in many cases needs to be more market driven. “Companies that do [transportation infrastructure] work are heavy on equipment and heavy on labor, and, by necessity, very operationally driven cultures. Compound that by them trying to be the low bid on any given day, the mindset of the companies can become a little insular and they can think that that is the only way to work. But there are companies that can do a very good job getting out there and making opportunities and getting in the way of opportunities.”

For example:

“We have clients that do unsolicited proposals. Basically that’s going, unasked, to a public entity and saying, ‘Okay there’s been no bids coming from you in while, but you need to do something and you know it, so here’s our design-build, design-build-operate, design-co-own, or whatever structure they present, and it would solve your problem.’ There are mixed reactions, yes. It’s successful in Canada and we are seeing more companies in the United States look into it.”

A year ago the economy seemed poised for stronger, sustainable economic growth. And then, due in large part to the European sovereign debt crisis and rising energy prices, consumer and business confidence waned. Private-sector growth, as a result, entered a period of slowdown. Furthermore, American Recovery and Reinvestment Act (ARRA) stimulus decreased as a positive for economic growth, forcing the Federal Reserve to enact a new round of monetary stimulus (QE2) to avert the potential of a double-dip recession. This was supplemented with fiscal stimulus including the “payroll tax holiday” and extended unemployment benefits.

Real GDP, job growth and confidence recovered. Seemingly, the economy was again on a sustainable path of stronger growth and job creation in excess of 200,000 monthly. Once again, however, this proved to be a false start to stronger, sustained growth. The political games played by Congress over the debt ceiling exerted adverse influence on near-term growth. The debt ceiling debate injected new uncertainty and risk onto the economic landscape. Consumers, business and bank confidence was already weak and this added dose of risk hindered real economic activity.

Only recently has better economic news begun to surface – accented by the decline in the unemployment rate. This news could represent another false start. This first quarter of 2012, for example, could represent a significant challenge to economic growth. The payroll tax and extended unemployment insurance benefits will expire year-end. Federal aid to the states has already expired. Furthermore, the U.S. Energy Information Administration expects energy prices will rise. These conditions, and others, could result in significant first-quarter weakness. While PCA expects sustained, tepid economic growth, the potential for a new recession in 2012 cannot be dismissed.

If such a path develops for the economy, it does not imply a further significant step down in construction activity. Quite frankly, residential, nonresidential and public construction activities are already near floor levels. Rather, such a scenario suggests a longer recovery period for construction activity – perhaps by a year or more.

Perversely, it could very well be that weakened economic conditions could result in a shift in political thinking and add pressure to result in a comprehensive new highway bill that addresses the country’s future needs – and not just a patchwork of fixes. Demographics don’t lie. In 20 years the United States’ driving age population is expected to grow by 50 million more licensed drivers. Congestion will worsen and the adverse consequences associated with infrastructure neglect will multiply. The invisible taxes associated with inaction in expanded highway investment will increase.

Sales of construction equipment continue to rebound from the depths of the recession, but there’s still uncertainty in the marketplace, both in the United States and globally. For a significant segment of our industry, there is still too little meaningful action on infrastructure funding. Our annual “outlook” survey cites highway funding as a major factor influencing future business.

With 2012 as an election year, this usually means campaign rhetoric instead of real action. But politicians are talking about jobs. It is a chance to put construction jobs “front and center” with not only presidential hopefuls but also legislators as they campaign in their districts.

We’ve used the “I Make America” pro-manufacturing campaign to spotlight infrastructure investment as a proven way to create and maintain jobs for American workers, for a sustainable recovery. We need to continue to frame the discussion for the general public and lawmakers: Infrastructure investment is not just a “potholes” issue that only benefits the construction industry; it is a critical business and quality-of-life issue. It affects every community, company, family and individual. An adequate transportation system translates into safer and more efficient travel that advances commerce and quality of life.

Congress needs to focus on policies that create and maintain jobs, not unnecessary and excessive regulatory and tax burdens. We have a special website – A Day in American Life (found at adayinamericanlife.com) – with real stories from real people in our AEM member companies that underscore how companies are collections of hard-working people, not faceless entities, and they make a positive difference in their communities.

Priority number one in 2012 is making more noise in Washington – a key issue is working to gain bipartisan understanding of and real action on transportation infrastructure legislation. We need Democrats and Republicans alike to stand up and have the political will to do what is needed for the long-term benefit of our economic well-being. And, especially in the current economic environment, we need to realistically look at where the money will come from. We know the current Highway Trust Fund is inadequate; we must look for other practical solutions that ensure the nation’s transportation needs are met.

An Expert Opinion:

John Horsley, executive director,

The American Association of State Highway and Transportation Officials (AASHTO)

While the federal highway and transit programs have been operating under a series of eight extensions since expiration of SAFETEA-LU in September 2009, recent developments in Congress are providing encouraging signs for 2012.

First, House and Senate leaders have publicly stated their preference to maintain the current annual funding level for surface transportation in the next reauthorization, which is about $40 billion for highways and $11 billion for transit. The knotty question of identifying politically acceptable taxes or fees to enhance the Highway Trust Fund revenues or finding the right “offset” from elsewhere in the federal budget remains unresolved. However, this funding commitment, combined with the multiyear length of the bill, will send an unmistakable signal to all transportation stakeholders that there will be much greater stability and predictability to solidify transportation’s already indispensable role in driving the nation’s economic recovery for years to come.

Second, the proposed Senate legislation, Moving Ahead for Progress in the 21st Century (MAP-21), and the House outline, place great emphasis on consolidating the number of federal programs. For example, MAP-21 focuses resources on key national goals and core formula programs by reducing the number of program categories from about 90 today down to less than 30. Similarly, the House is looking to eliminate “nearly 70 programs by consolidating duplicative programs and eliminating programs that do not serve a federal purpose.”

Finally, there is strong bipartisan support in Congress to speed up the delivery of transportation projects — a process that currently takes more than a decade for many projects. MAP-21 includes provisions to expedite project delivery while maintaining important environmental safeguards. Similarly, the House is looking at allowing concurrent project reviews, delegating project authority, and placing hard deadlines for decisions on permits and project approvals.

From the perspective of state departments of transportation, all of these elements represent significant improvements to the federal surface transportation program that we look forward to seeing in 2012.

An Expert Opinion:

Pete Ruane, president and CEO, American Road and Transportation Builders Association (ARTBA)

Winston Churchill once said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

In the hyper-partisan cloud hanging over Capitol Hill, the transportation design and construction industry was faced with its share of difficulties during 2011. In January, House Republicans changed an internal rule that had existed since 1998 to eliminate the requirement that all incoming Highway Trust Fund revenues be spent annually. In April, the House took aim at the highway and transit program again with a budget resolution blueprint that called for a 30 percent cut in overall transportation investment levels for FY 2012.

In the face of these major obstacles, ARTBA, industry coalitions and Capitol Hill allies could have folded the tent and gone home. But, we didn’t because we saw the “opportunity in every difficulty.” The industry’s grassroots activists kept fighting … and hammering home the point that increasing investment was essential for U.S. job creation and economic recovery; outcomes both parties and the President proclaimed were their top priorities.

By the fall, we had successfully turned back the tide against such a massive infrastructure investment cut. The Senate Environment and Public Works Committee agreed on a bipartisan reauthorization bill that maintains current investment levels, plus inflation, for the next two years. House Transportation & Infrastructure Committee Chairman John Mica (R-Fla.), with support and direction from Speaker John Boehner (R-Ohio), is now working on a multi-year bill for early action in 2012 that the GOP says is a key component of their job creation agenda.

As a result, we remain cautiously optimistic about the prospects for action by both chambers on a long-term bill in early 2012. It will continue to be challenging, but if we stick together and keep the heat on all members of Congress to do their jobs as well as do the right thing, better days lie ahead for our industry.

An Expert Opinion:

Mike Acott, president, National Asphalt Pavement Association (NAPA)

Contractors are the original “when life gives you lemons, make lemonade” people. They’re entrepreneurs and they know how to spot opportunities.

In this spirit, contractors have harnessed the pressures of the recession to ramp up innovations in recycling. In the past few years, the asphalt industry – already America’s number one recycler – has sharply increased the use of both reclaimed asphalt pavement (RAP) and reclaimed asphalt shingles (RAS). In 2005, about 12.5 percent of the asphalt pavement material used was made up of RAP. According to a survey that NAPA performed on behalf of the Federal Highway Administration, that number increased to 17.6 percent in 2010. Use of RAS increased 57 percent from 2009 to 2010. The asphalt industry is also the country’s largest user of recycled fuel oil (RFO).

Altogether, the recycling efforts of the asphalt industry, including both the incorporation of RAP and RAS into pavements and the use of RFO in production facilities, saved America more than one billion gallons of oil in 2010.

NAPA continues to advocate at the national level in favor of a robust, multiyear highway program. The “multiyear” aspect is critical to both those who own pavements and those who build them. Many major infrastructure projects are constructed over a period of several years, and capital costs are considerable. If funding in future years is uncertain, agencies and private owners will not be able to commit to projects. If owners do not commit to projects, some workers may lose their jobs and contractors may be reluctant to purchase new equipment. In the absence of a multiyear federal-aid highway program, we at least know the level of federal funding for 2012: $41.6 billion, about the same as 2011.

This economy has provided plenty of lemons – and NAPA’s members are ready to make lemonade.

An Expert Opinion:

Toby Mack, president and CEO, Associated Equipment Distributors

Aside from some isolated bright spots, the overall picture remains weak for most U.S. dealer markets.

However, if you’re in geography with active energy exploration and production, and with the right products, business is good. Particularly in the Marcellus and Utica shale-gas plays in Pennsylvania, Ohio and (one hopes soon) New York, business is actually great or will soon be. It’s the same with other horizontal drilling/hydraulic fracturing areas in the South Central and West. If you’re in North Dakota or Montana and supplying the Bakken oil fields, you’re maxed out: You can’t find enough people and you can’t get enough product to meet demand. If you’re in strong agricultural areas and, again, have the right products, you’re likely benefitting from strong demand and high prices for corn and beans – largely driven by ethanol production. If you’re in underground products that support broadband expansion, that’s good too. And if your area of responsibility covers coal, copper or gold mining, the same is true. Also reasonably healthy is government-funded institutional building construction such as for education, healthcare or government facilities.

Despite the best efforts of the Obama administration and its regulators to throttle any activity that disturbs the dirt, water or air, or encourages consumption of fossil fuels, I believe the compelling economics of our new-found energy abundance will trump absurd attempts to run the country on windmills and solar panels.

For most of the traditional – and more universal – drivers of demand for construction machinery – residential housing, commercial construction, transportation and water infrastructure – the news for 2012 isn’t much better than it was in 2011. None of these markets appear ready to rebound in 2012.

Thus, for many dealers the challenge remains to keep product support operations – parts and service – at the forefront to support equipment owners keeping old fleet running until a better outlook supports the purchase of new. Rentals will also improve as the jobs that are out there require them, but with little follow-on work in the pipeline to support purchase.

We will see robust demand return in 2013, provided we get a federal government in Washington that understands how to encourage rather than stifle private-sector growth. AED is working hard on this and welcomes any support our industry can offer.

Construction should finally reverse its five-year slide in 2012. However, the overall increase will be modest and very unevenly distributed among project types.

Rental apartment construction may be the biggest winner. By late 2011, rents were rising and vacancy rates falling in nearly every metropolitan area. Permits and starts were up sharply. These indicators virtually guarantee a strong rate of spending on new rental construction in 2012. In contrast, the much larger single-family market appears to have bottomed out, but has yet to post any sure signs of improvement.

Private nonresidential construction will be led by power and energy projects; manufacturing plants; and warehouse, distribution, trucking and rail facilities. Hospital and private higher-education construction may also rebound modestly. But the once-large retail and office categories are likely to remain in the doldrums, driven by remodeling rather than new stores, shopping centers or office buildings.

Two developments will have a particularly strong influence on the types and locations of construction activity in 2012 and beyond. First, the exploitation of shale-based natural gas and oil formations in Pennsylvania, eastern Ohio, North Dakota, several parts of Texas and other states is generating demand for construction in those regions and “downstream.” Downstream activities include new interstate pipelines and storage facilities, factories that will use the gas as a feedstock or fuel and export terminals. Second, the widening of the Panama Canal is leading ports, distributors, railroads and truckers to improve capacity and efficiency along the East and West Coasts, and also inland destinations.

Unlike the generally improving private segments, public construction appears headed for a third consecutive year of decline. Federal government programs that kept some contractors afloat in 2009-2011, such as military base realignment and stimulus projects, have largely ended, and Congress is holding down regular appropriations for both building and infrastructure spending. State tax revenues have been increasing, but not enough to restore funding for most construction. School districts and local governments, which depend heavily on still-shrinking property tax receipts, are cutting construction budgets even more deeply.

Combining these pluses and minuses suggests that construction spending will grow enough in 2012 to overcome the 2- to 3-percent decrease expected for 2011 when the year’s figures are finalized. But the total will remain as much as 30 percent below the peak reached in 2006.